Banking is a Very Profitable Business

Bank of America, JP Morgan and Well Fargo all reported earnings this week and the reports were generally pretty good. The mega banks have come a long way towards restoring profitability over the past five years. Wells Fargo in particular, which is arguably the healthiest bank of its peer group, was able to demonstrate the profit potential of these huge institutions.

In 2013, $WFC earned a net profit of $21.9 B on $83 B in revenue, a 26% profit margin. To put that in context, below is Wells Fargo’s margin compared to the 10 largest US tech companies (by market cap). Technology is generally known to be a high margin industry, but Wells Fargo ranks right up there with those companies in terms of net profit margin. In fact, Wells Fargo’s profit margin is higher than Apple’s, Google’s, and IBM’s, not to mention some other high margin, non tech companies like Coca-Cola, Procter & Gamble and Disney. Once $BAC, $JPM and $C have put their legacy issues to rest, there’s no reason to believe that they can’t reach similar levels of profitability.

Perhaps what’s more surprising is that even despite this profitability, Wells Fargo and its peers still trade at a huge discount relative to most non-bank blue chips. Compared to its book value, Wells Fargo is actually the most expensive of the mega banks, but even then it still only trades for about 11x earnings.